GIFT  OF 


Why  Governments   Fail 

in 
Commercial   Enterprises: 

The  Fiscal  Barrier   Between 
Plan  and  Execution 


BY 


A.    LINCOLN    LAVINE 


American  Telephone   and  Telegraph  Company 

Commercial    Engineer's    Office 
New  York 


Why  Governments  Fail  in    Commercial 

Enterprises: 

The   Fiscal   Barrier   Between    Plan 
and   Execution 


By   A.    LINCOLN    LAVINE 


S  oSfTe  wlTh  a-printinS  Pla«t  in  Cincinnati,  Ohio,  belonging  to 
lack  of  funds  f*^™1™*  °rf  mzations  in  th*  world,  shut  do™  for 

In  another  branch  of  this  same  concern,  in  New  York  City   two 

recording  clocks  lay  unused  for  three  months.     During  M  that 

time  there  _  was  no  money  to  be  had  for  their  repair     Tta  dollars 

would  probably  have  repaired  the  clocks.     The  concern  ownL  them 

"  reV6nUe  °    m°'re  thM  tw°-thirds  °f  " 


I  as      Buth  w°-rs  °       mon 

But  the  clocks  remained  useless.     There  was  not  even  ten 
cents  on  hand  available  for  their  repair. 

the  concern  in  question  is  the  United  States 


3sasrr? 

rt  is   ,t  is  not  easy  to  point  out,  in  this  situation,  the  political 
s  of  omission  or  commission  which  go  to  make  un  the  le^im^ 

mCkraker-    Th6  SUSpended  Print  **&*£ 


dW    ,w,r-         6  SUSpene    Print  **** 
charac  efis±kSfare  Iess.syraPtoms  of  a  curable  disorder,  than  normal 

jtafti**  pec    !  system-  They  are  ^pJy  the  result  °f  ^ 


every  branch  of  governmental  endeavor 
s  ghost,  "will  not  down." 

3 

347250 


This  law  is  the  offspring  of  two  forces,!  a  fiscal  theory,  and  a 

Apolitical  practice :  both  apparently  necessary  to  run  a  government,  both 

ever  present  in  all  governments,  and  both  fatal  in  leaving  a  vulnerable 

spot  in  the  government's  make-up,  an  Achilles'  heel,  which  seems  to 

place  a  definite  limitation  upon  what  a  government  can  do,  and  do  well. 

^ 

The  fiscal  theory  is,  that  not  a  stitch  of  governmental  work  can 
be  done — not  a  dollar  spent — without  some  definite  appropriation  there^ 
for;  so  that  if,  (as  was  actually  the  case  a  few  years  ago),  the  travel- 
ing allowances  of  the  officials  of  the  railway  mail  service,  whose  duties 
consist  in  personal  inspection  of  the  efficiency  and  needs  of  the  service, 
happen  to  reach  the  limit  set  by  the  appropriations,  the  men  are  com- 
pelled to  quit  work  absolutely,  although  this  in  no  way  hinders  them 
from  later  collecting  salaries  for  the  work  they  didn't  do. 

The  political  practice  is,  that — no  matter  how  much  time  and  toil 
and  money  may  have  been  expended  instructing  Congress  as  to  the 
wants  of  the  departments — when  the  time  comes  to  respond,  the  vot- 
ing of  appropriations  is  governed  not  by  the  actual  needs  of  the  ser- 
vice, but  by  the  political  needs  of  the  moment.  Secretaries  of  the 
Treasury,  professors  of  political  economy  and  other  fiscal  experts 
have  heaped  up  a  veritable  mound  of  literature,  calling  attention  to 
the  situation,  and  urging  some  kind  of  reform;  but  unfortunately  the 
fact  remains,  that  those  who  hold  the  government  purse-strings  are 
not,  and  cannot  be,  in  a  position  to  do  intelligent  spending. 

To  illustrate,  let  us  see  how  Uncle  Sam  lays  out  his  dollars  in  tak- 
ing care  of  his  various  enterprises. 

Congress,  upon  assembling  each  year  in  December,  receives  a 
"Letter  from  the  Secretary  of  the  Treasury."  This  "letter"  is  a 
document  of  no  mean  bulk,  full  of  statistics  purporting  to  show  how 
much  money  the  government  will  have  to  spend  during  the  coming 
year  to  run  its  business.  The  document  is  technically  referred  to  as 
the  Annual  Estimates.  Now,  no  Congressman  imagines  for  a  minute 
that  these  Estimates  represent  the  Secretary  of  the  Treasury's  mature 
and  deliberate  judgment  of  what  it  should  cost  to  run  the  government 
for  the  coming  year.  Every  Congressman  knows  just  how  the  formid- 
able array  of  statistics  presented  to  Congress  was  got  up.  He  knows 
that  the  imposing  tables  of  figures  were  prepared  by  the  various  depart- 
ments at  the  beginning  of  their  various  tasks  shortly  after  July  1st; 
that  the  bureaus  proceeded  solely  upon  the  basis  of  the  current  year 
to  guess  at  their  probable  needs  for  a  financial  year  which  was  not 
to  begin  for  twelve  months  to  come,  and  not  to  end  until  almost  two 
calendar  years  had  elapsed  after  the  time  when  the  work  on  the 
estimates  began.  He  knows,  what  is  more,  that  the  Secretary  of  the 
Treasury  has  practically  no  say  whatever  in  getting  up  the  estimates, — 
that,  for  instance,  if  the  War  Department  should  multiply  or  divide  by 
ten  its  previous  estimate  for  river  and  harbor  expenditure,  the  Secre^ 
tary  must  remain  silent,  and  embody  the  estimate  in  his  "letter." 


It  is  not  surprising,  therefore,  that  when  the  Estimates  are  passed 
on  to  the  House  appropriation  committees,  they  are  treated  as  a  mere 
collection  of  guesses,  not  to  be  taken  seriously,  and  to  be  used  as  a 
guide — the  roughest  of  guides — only  when  political  considerations  are 
absent.  But  political  considerations  are  rarely  absent.  Only  too  often, 
when  the  needs  of  a  service  have  become  exceedingly  pressing,  special 
estimates  are  compiled  after  long  and  scientific  study,  after  laborious 
and  expensive  research,  to  be  lightly  tossed  aside  by  the  appropriation 
committee,  because  political  expediency  at  the  time  happens  to  run 
counter  to  the  needs  of  the  service.  But  this  is  not  all.  When  the 
nominal  needs  of  the  service  have  adventured  through  the  committees 
and  are  presented  to  the  House,  they  are  subjected  to  the  fire  of  new 
influences,  new  opinions,  new  and  extended  possibilities  of  political 
pressure.  And  when,  in  their  modified,  battered  or  distorted  form, 
they  have  passed  through  the  House,  they  must  run  the  gauntlet  of 
the  Senate.  Then  the  Executive  approves  or  disapproves. 

The  results,  of  course,  are  natural.  Illustrations  are  constant!^ 
recurring.  Not  long  ago,  a  great  transatlantic  steamer  struck  bottom 
in  New  York  harbor.  Most  people  called  it  an  "accident."  It  was  not 
an  accident.  It  was  a  direct  result.  The  money  which  should  rightly 
have  gone  to  the  improvement  of  that  harbor  had  been  diverted,  in 
the  name  of  political  expediency,  to  the  scooping  out  of  some  useless 
bayou,  which  never  will  be  a  harbor,  and  which,  if  it  could  be  made 
one,  would  never  be  used.  Had  this  been  up  to  a  private  company,  a 
great  hue  and  cry  would  have  been  raised,  and  rightly  so.  The  private 
company  would  have  been  held  strictly  accountable.  But  the  govern- 
ment was  able  to  ignore  an  important  public  need  with  perfect  im- 
punity, and  escape  any  accountability  for  the  direct  result  of  a  dis- 
criminatory diversion  of  funds. 

This  is  only  one  of  countless  examples.  Under  our  system  of 
government,  a  small  majority  of  either  house,  or  the  Executive,  may, 
by  cutting  off  financial  support,  starve  or  temporarily  paralyze  any 
important  public  need.  Take  so  vital  a  branch  of  government  activity 
as  the  federal  civil  service  commission.  Not  only  its  vigorous  adminis- 
tration, but  its  very  existence,  is  being  threatened  annually,  not  by 
the  repeal  of  the 'law  under  which  it  exists, — for  that  would  not  be 
tolerated  by  the  sentiment  of  the  country, — but  by  a  small  crowd  in 
one  house  temporarily  securing  sufficient  power  to  jeopardize  its  fiscal 
support.  It  takes  constant  lobbying  on  the  part  of  its  friends  to  keep 
it  from  this  form  of  submersion.  This  is  even  true  of  state  legisla- 
tures. In  the  state  of  Colorado,  a  few  years  ago,  the  civil  service  work 
was  absolutely  abolished  by  a  failure  of  the  legislature  to  provide  the 
necessary  appropriation. 

All  this  does  not  mean,  necessarily,  that  the  machinery  of  Ameri- 
can government  must  be  remodeled.  It  is  simply  an  indication  of  what 
a  government  may  undertake  with  profit, — what  it  may  or  must  do 
itself,  and  what  it  might  better  leave  to  others.  For  when  we  pass 

5 


from  the  simple  and  necessary  functions  of  government  to  those  of  a 
commercial  nature,  difficulties  multiply,  and  evils  widen  into  a  sea. 
The  post  office  business  has  been  taken  as  an  example.  Yet  the  post 
office,  as  a  business,  is  comparatively  simple.  Unlike  the  railroad, 
telegraph  or  telephone,  it  has  practically  no  "plant"  to  look  after,  no 
complicated  equipment  to  worry  about,  no  intricate  organization  to 
maintain.  As  Professor  Daniels,  recently  appointed  Interstate  Com- 
merce Commissioner,  has  pointed  out:  "Where  other  enterprises  call 
for  venturesomeness  and  speculative  activity,  the  post  office  requires 
orderly  routine;  where  the  former  demand  much  fixed  capital,  the 
post  needs  comparatively  little  ;  where  in  ordinary  business  transactions 
prices  vary  for  the  same  service,  the  post  office  has  always  one  price 
for  the  same  service;  *  *  *  where  the  freight  agent  is  puzzling 
over  a  complicated  tariff,  the  postal  clerk  has  the  same  simple  regula*- 
tions  to  guide  him  today  and  tomorrow." 

(/  There  is  no  need  to  theorize  on  this  subject.  Foreign  governments 
have  furnished  a  striking  object  lesson  of  this  truth,  for  which  chapter 
and  verse  can  be  cited.  If  we  take  a  single  utility,  the  telephone,  and 
trace  its  management  under  the  various  foreign  governments  which 
have  assumed  its  operation,  we  learn  a  story  of  neglect  and  starvation 
to  which  this  utility  has  been  subjected,  with  grave  and  far-reaching 
results,  for  which  our  government,  fortunately,  can  furnish  no  parallel. 


telephone  service  in  Great  Britain  is  operated  by  the  govern- 
'  ment,  which  assumed  complete  control—about  two  years  ago.  The 
rapid  deterioration  in  telephone  service  which  has  followed,  has  raised 
a  veritable  storm  of  protest  and  disapprobation,  which  even  the  strong- 
est opponents  of  Government  Ownership  did  not  dare  to  predict.  The 
British  press  teems  with  editoTial  attacks  upon  the  management,  with 
letters  from  irate  subscribers  bitterly  condemning  the  service,  with 
accounts  of  delays,  mismanagement  and  confusion  in  the  handling  of 
the  enterprise  by  the  government.  All  this  is  heaped  upon  the  head 
of  the  Postmaster-General,  who  has  charge  of  the  service.  Members 
of  Parliament  protest  in  heated  speeches,  and  blame  the  Postmaster- 
General  ;  Chambers  of  Commerce  send  deputations  laden  with  petitions, 
and  blame  the  Postmaster-General  ;  writers  satirize,  speakers  anathe- 
mize,  and  business  men  expostulate,  —  and  all  blame  the  Postmaster- 
General.  Only  the  Postmaster-General  himself,  perhaps,  and  one  or 
two  of  the  more  sober  members  of  Parliament,  realize  that  the  trouble 
with  the  service  has  been  the  trouble  with  the  government  itself.  The 
Honorable  C.  S.  Goldman,  M.  P.,  has  put  the  whole  matter  in  a 
nutshell  : 

"Telephones  in  this  country  were  a  private  commercial  venture.  The 
Government  owned  the  telegraph  and  tried  to  throttle  the  telephone.  In 
1892  the  Government  forced  the  company  to  sell  its  trunk  lines,  and  although 
it  has  made  a  parade  of  figures  showing  the  large  amount  of  mileage  of  trunk 
lines  added,  the  service  has  never  kept  pace  with  public  requirements,  and 
there  has  been  a  constant  stream  of  complaints  from  Chambers  of  Commerce 
and  other  public  bodies,  as  well  as  from  individual  users.  The  truth  is  the 

6 


Government   made  a   Cinderella   of   the  trunk  lines,   to   the   end  that  their 
favoured  telegraph  should  remain  the  belle  of  the  wires. 

"In  1898  they  went  further.  They  themselves  started  competing  in  Lon- 
don, and  cajoled  provincial  municipalities  to  do  the  same.  Disappointment 
and  failure  again!  But  a  harassing  failure  to  the  Telephone  Company  and 
the  customers  of  all  services.  So  in  1904  an  agreement  was  made  to  pur- 
chase in  1911  the  company's  undertaking.  As  to  the  price,  I  say  nothing. 
I  am  merely  thinking  of  public  convenience  and  an  efficient  service.  But  as 
to  the  Government's  inaction  between  1904,  when  they  became  potential  pur- 
chasers, and  1911,  when  they  were  actual  possessors,  I  have  to  say  much. 
The  company  had  contracted  to  sell  at  tramway  prices.  On  that  basis  they 
could  not  be  expected  to  develop  and  substantially  maintain  the  service.  The 
Government  had  a  price  contract  with  a  time  fixed,  and  they  had  accepted 
the  responsibility  for  the  efficiency  of  the  service  in  the  future.  They  could 
and  they  should  have  arranged. 

"It  was  the  duty  of  the  Government,  having  assumed  by  that  agreement 
the  responsibility  of  providing  the  service  from  January  1,  1912,  to  insure 
that  when  that  time  came  everything  should  be  in  readiness  for  the  great 
development  of  the  service,  which  they  themselves  from  time  to  time  stated 
would  take  place  when  they  took  over  the  plant.  They  could  and  they  should 
have  arranged  with  the  National  Telephone  Company  that  the  company  should 
have  continued  its  normal  operations,  but  that  ample  provision  for  the  after- 
purchase  period  should  be  made  at  the  expense  of  the  Post  Office. 
*****  ******* 

"Beyond  the  provision  of  the  new  exchanges  at  Avenue  and  exten- 
sions to  a  few  of  his  own  exchanges,  there  is  no  evidence  that  the  Post 
Office  took  any  steps  in  the  matter,  and  these  operations  were  largely  under- 
taken in  order  to  avoid  purchasing  the  corresponding  exchanges  of  the  com- 
pany— an  attempt  which  was  not  successful.  In  fact,  what  the  Government 
in  effect  did  do  was  to  paralyze  the  service  for  seven  years,  so  that  they 
might  buy  it  cheaply,  and  then — well,  every  telephone-user  knows  what  he 
has  dropped  into.  Even  the  Postmaster-General  had  to  admit  that  the  opera- 
tions were  bungled." 

It  is  the  same  trouble,  the  joint  off-spring  of  the  fiscal  theory  and 
political  practice  inhering  in  all  governments, — the  fatal  gap  between 
the  public  purse  and  the  public  plant, — which  has  been  responsible  for 
Great  Britain's  telephone  plight  today;  so  subtle,  that  few  Britons 
besides  Goldman  have  been  able  to  perceive  it;  so  deep-seated  and 
vital,  that  all  the  Postmaster-General's  desperate  efforts  to  improve 
the  telephone  service  have  proved  of  little  avail. 

i-  l^Li  we  turn  to  France,  we  find  the  lights  and  shadows  in  the 
ture  of  government  mismanagement  still  more  clearly  portrayed.  The 
French  government  acquired  a  complete  monopoly  of  tHe  telephone 
service  as  early  as  1889.  The  French  telephone  service  is  today — if 
we  may  accept  a  characterization  made  by  French  government  officials 
themselves, — the  worst  that  can  be  found  in  any  of  the  larger  civilized 
countries  of  the  world.  The  service  is  so  slow  and  unreliable,  that 
business  men  frequently  employ  messengers,  instead  of  resorting  to 
the  telephone.  In  service  between  cities,  communication  is  often  more 
rapid  by  railroad  than  by  telephone.  And  back  of  it  all  we  find  the 
same  reason :  lack  of  systematic  financial  management,  inherent  and 
unavoidable.  The  head  of  the  telephone  service  will  submit  to  the 
Chamber  of  Deputies  a  hundred  chapters  of  minute  and  elaborate 

7 


statistics.  "We  must  have  so  and  so  many  francs  for  construction 
and  improvement,  or  the  telephone  service  will  continue  to  deteriorate." 
The  appropriating  body  will  receive  the  demand,  and  with  it,  perhaps, 
hundreds  of  chapters  of  statistics  from  other  departments.  Nearly 
800  chapters  are  sometimes  submitted  by  the  twelve  ministers  who 
constitute  the  department  heads  in  France.  The  budget  committee  is 
literally  swamped  with  statistics.  Even  if  the  members  were  entirely 
free  from  political  considerations,  they  could  not  possibly  frame  a 
proper  business  judgment  on  the  needs  of  each  service.  The  outcome 
is  only  natural.  The  telephone  administration  may  ask  for  an  appro- 
priation of  a  hundred  million  francs  to  carry  out  a  wise  plan  of  con- 
struction and  equipment,  which  would  result  in  annual  economies  and 
bring  the  telephone  service  up  to  the  requirements  of  the  public.  The 
call  is  simple:  "A  stitch  in  time,  to  save  ninety  and  nine."  But  if  the 
appropriating  body  considers  it  better,  politically,  to  expend  money 
for  warships,  or  waterways,  or  public  buildings,  the  telephone  budget 
will  be  cut  in  two,  and  the  telephone  department  must  shift  as  best  it 
can  on  "short  rations."  This  may  mean  no  rations  at  all,  for  a  hun- 
dred millions  may  be  an  absolute  minimum,  without  the  expenditure 
of  which  the  proposed  construction  would  be  useless.  Here  is  the 
story  of  Deputy  M.  T.  Steeg,  (translated  from  one  of  the  French 
Senate  Documents)  : 

"The  history  of  the  telephone  is  only  the  story  of  successive  programs, 
very  brilliantly  conceived,  but  never  realized  for  lack  of  resources. 

"In  1889,  after  the  purchase  of  the  private  exchanges,  the  multiple  switch- 
board appeared  in  the  United  States.  The  Administration  should  at  once 
have  abandoned  the  old  boards  which  the  'Societe  General  des  Telephones' 
had  left  us.  Thus  came  about  the  complications  and  delays  which  our  old 
Paris  subscribers  still  remember. 

"Again  in  1894  a  program  of  extension  of  the  telephone  system  was 
worked  out.  This  provided  for  the  construction  of  six  new  Centrals  and 
was  to  be  carried  out  within  two  years. 

"Next  a  new  system  of  operation,  introduced  in  1900,  obliged  the  Admin- 
istration to  perfect  its  material.  This  work,  which  the  Administration  prom- 
ised to  finish  in  a  short  time,  was  not  even  finished  in  1905.  In  fact  it 
never  was,  for  technical  progress  had  then  already  condemned  these  former 
methods  of  operation.  After  1905,  the  Administration  abandoned  the  ancient 
conceptions,  and  the  program  of  1906  substituted  at  last  the  central  battery 
system.  But  instead  of  replacing  at  once  the  old  apparatus  with  new,  the 
Department  tried  to  transform  and  adapt  existing  apparatus,  an  economy 
which  cost  the  Paris  system  three  years  of  bad  service. 

"The  transformed  apparatus  was  worn  out  at  the  end  of  four  years  but 
funds  to  replace  it  were  lacking.  The  Administration  could  not  borrow  the 
money  needed,  and,  therefore,  was  forced  to  resign  itself  to  its  fate. 

"The  flat  rate  subscription  is  costly  and  prohibitive  for  a  large  number 
of  individuals.  A  decision  of  May  7,  1901,  promised  a  reduction  to  300  francs 
which  has  never  been  realized.  The  preceding  government  had  issued  a 
decree  intending  to  substitute  for  the  flat  rate  the  message  rate.  For  this  it 
needed  33  million  francs  to  carry  on  the  work  of  building  new  offices  and 
for  installing  new  apparatus.  But  where  to  find  the  money!  As  the  General 
Budget  refused  to  advance  so  large  a  sum,  it  was  proposed  to  use  the  gross 
receipts  of  the  interurban  circuits  after  reimbursing  in  a  lump  sum  the  depart- 

8 


ments.  This  amount  was  to  be  used  for  reorganizing  the  Paris  system  by 
delaying  the  development  of  the  provincial  telephone  lines.  The  Budget  Com- 
mission opposed  this  measure. 

"Next  M.  Millerand  took  up  the  study  of  the  bill,  completed  a  program 
of  reforms  and  was  looking  for  a  disinterested  person  who  would  lend  him 
the  100  million  francs  needed  to  effectuate  the  plan.  Not  being  able  to  borrow 
for  the  needs  of  the  service  the  Administration  asked  the  Chamber  of  Com- 
merce of  Paris  to  do  what  the  Administration  itself  was  incapable  of  doing." 

Sometimes  the  French  government,  to  make  up  for  its  neglect 
in  past  years,  will  furnish  an  extra  heavy  appropriation.  The  result, 
of  course,  is  not  a  healthful  replenishment,  but  a  glut.  Extravagant 
and  careless  expenditure  become  the  order  of  the  day.  An  example 
of  this  is  the  elaborate  central  station  which  was  recently  built  in  the 
Rue  des  Archives,  Paris.  This  structure,  which  one  Frenchman  char- 
acterized as  "the  Babylonian  palace  of  Parisian  telephony/'  cost 
upwards  of  7,000,000  francs.  Architecturally,  it  is  beautiful.  Tele- 
phonically,  it  is  a  farce.  It  was  built  to  accommodate  a  section  havirfg 
3,000  subscribers.  The  annual  rate  of  increase  in  subscribers  at  that 
point,  as  estimated  in  the  French  Budget  Report,  is  120.  The  two 
switchboards  in  this  section  are  designed  to  accommodate  20,000  sub- 
scribers, leaving  17,000  lines  unused.  On  this  basis,  it  will  take  140 
years  before  the  switchboards  will  come  into  full  use!  "After  an 
attempt  such  as  this,"  ironically  observes  the  Official  Budget  Reporter, 
"will  anyone  dare  to  accuse  the  Administration  of  lack  of  foresight?" 

A  striking  example  of  the  starvation-by-neglect  tendency  of  gov- 
ernment management  is  that  of  the  Gutenberg  exchange,  in  Paris. 
After  a  dozen  years  of  telephone  stagnation — during  which  period 
there  were  years  in  which  no  telephone  appropriations  were  made  at 
all,  and  years  when  appropriations  were  so  large  that  they  could  not 
be  used  before  they  were  withdrawn — the  government  installed  the 
"common  battery"  system  in  the  Gutenberg  exchange.  This  system 
had  long  since  been  adopted  in  America;  but  in  France  it  was  still 
regarded  as  a  new  improvement.  No  sooner  was  the  system  installed, 
than  the  French  government  was  warned  that  it  should  provide  ade- 
quate electrical  protective  apparatus  to  avoid  trouble  from  high- 
voltage  currents.  But  the  warning  fell  on  deaf  ears.  The  government 
felt  that  it  had  spent  enough.  The  result  was  a  conflagration,  which 
completely  reduced  the  exchange  to  junk  and  ashes,  and  left  a  large 
section  of  the  city  stranded  without  telephone  communication.  This, 
again,  was  called  an  "accident,"  just  as  the  New  York  Harbor  episode 
was  called  an  "accident."  It  was  not  an  accident ;  it  was  a  result. 

In  Germany,  we  might  expect  an  exception  to  the  rule.  Germany, 
unlike  more  democratic  countries,  is  comparatively  unburdened  with 
numerous  checks  and  balances,  with  frequent  rotations  in  office  and 
consequent  changes  in  management  and  policy.  It  would  be  reason- 
able to  assume,  at  any  rate,  that  if  there  is  any  country  whose  govern- 
ment should  approximate  the  stability  and  efficiency  of  private  man- 
agement, Germany  is  that  country.  What  have  been  the  results? — in 

9 


the  telephone  field,  for  example,  to  pursue  the  illustration  which  has 
been  adopted. 

}  I/The  German  Empire  provides  a  government  owned  telephone 
service,  in  conjunction  with  a  government  owned  telegraph  service. 
The  condition  of  the  German  telephone  service  is  best  indicated  by 
the  circumstance  that,  in  the  fall  of  1912,  the  Imperial  Administra- 
tion decided  to  send  three  of  its  engineering  officials  to  America,  ac- 
companied (to  quote  the  Berlin  cablegram  published  in  the  New  York 
Times')  by  "the  hopes  and  prayers  of  business  men  and  householders." 
"The  trip  is  undertaken,"  read  the  report,  "with  a  view  to  introducing 
radical  and  much-needed  reforms  in  the  antiquated  German  telephone 
system.  Telephones  are  cheap  in  Germany,  but  have  few  other  virtues. 
The  average  office  and  house  telephone  in  the  biggest  cities  costs  $50 
a  year,  and  long  distance  messages,  regardless  of  mileage,  cost  25 
cents  apiece  between  any  points  for  three  minutes.  In  other  respects," 
the  news  item  goes  on  to  say,  "the  service  is  abominable.  Telephoning 
after  10  o'clock  at  night  in  cities  costs  5  cents  extra  per  conversation, 
and  connections  are  possible  only  after  a  delay  of  three  to  five  min- 
utes, owing  to  the  reduction  of  the  daytime  staff  by  about  75  per  cent." 

The  German  Telephone  Administration  has  been  particularly  criti- 
cized for  its  lack  of  adequate  toll  facilities.  The  government  will 
usually  maintain  only  as  many  long  distance  telephone  lines  as  are 
sufficient  for  official  purposes,  so  that  if  a  citizen  wants  a  long  distance 
call  immediately,  he  pays  a  premium  for  the  privilege.  It  is  not  an 
uncommon  occurrence,  in  Germany,  to  stand  in  line  for  an  out-of- 
town  call  for  hours,  only  to  be  told  by  a  government  official  that  the 
trunks  are  all  engaged. 

Apologists  have  sought  to  explain  away  these  conditions,  by  assert- 
ing that  the  telephone  service  in  Germany  was  never  designed  to  be 
primarily  commercial,  but  is  rather  in  line  with  the  fulfilment  of  a 
military  and  political  function,  originated  in  Bismarck's  policy  of 
railway  nationalization.  The  explanation,  however,  does  not  possess 
the  merit  of  explaining,  for  Germany  has  tried  in  vain  to  place  its 
telephone  service  on  a  commercial  basis.  Its  very  failure  to  do  this 
reveals  the  true  cause  of  German  telephone  conditions,  and  only  fur- 
nishes another  illustration  of  the  unavoidable  limitation  to  which  all 
governments  are  subjected,  by  the  controlling  principle  of  governmental 
expenditure.  We  can  get  "behind  the  scenes"  if  we  but  glance  at  the 
German  budgetary  appropriations  for  telephone  service  through  a 
series  of  years. 

In  1904,  the  telephone  appropriation  was  22,000,000  marks.  In 
1905,  it  went  up  to  27,000,000.  It  continued  to  go  up,  in  1906,  1907  and 

1908,  to  38,000,000  to  45,000,000  and,  finally,  to  59,000,000.     Then, 
just  as  the  telephone  service  was  beginning  to  respond  to  the  increased 
investment,  the  appropriation  was  arbitrarily  cut  to  42,000,000  marks  in 

1909,  and,  again,  to  25,000,000  marks  in  1910.    Naturally,  plans  were 
demoralized,  the  service  took  a  slump,  and  criticism  became  widespread. 

10 


"A  leading  German  newspaper,"  said  the  New  York  Press,  in  giving 
an  account  of  the  popular  dissatisfaction  which  followed,  "points  out 
that  of  the  25,000,000  marks  only  1,700,000  marks  is  to  be  used  for 
trunk  wires,  against  14,000,000  in  the  previous  year,  and  only  13,000,- 
000  is  to  be  used  for  extension  of  the  system,  while  16,000,000  was 
asked  for  that  purpose  in  1909.  With  the  specified  amount  of  13,000,- 
000  marks,  it  is  contended,  it  will  require  the  greatest  economy  to 
supply  all  the  required  new  connections  for  which  there  is  likely  to  be 
a  demand.  The  fact  that  such  a  demand  will  exist  is  based  on  figures 
showing  that  the  number  of  new  stations  has  increased  largely  in 
each  year  since  1899  except  1908.  The  appropriation  for  trunk  wires 
is  for  the  improvement  of  the  long-distance  service,  and  is  considered 
too  small  because  of  constantly  increasing  traffic.  *  *  *  It  is 
pointed  out  that  France,  by  allowing  only  small  amounts  for  telephone 
purposes,  has  come  to  face  the  problem  of  renewing  an  antiquated 
system  at  double  cost,  and  that  is  construed  as  a  warning  to  Germany." 

All  this,  however,  was  of  no  concern  to  the  Imperial  Government ; 
for  in  1911,  the  telephone  allowance  was  cut  down  still  further  to 
22,000,000  marks.  The  appropriation,  clearly,  was  not  to  depend  upon 
telephone  requirements:  the  telephone  business  was  to  wait  upon  the 
appropriation.  It  is  therefore  not  difficult  to  understand  why,  despite 
the  usual  reserve  maintained  by  German  newspapers  in  their  criticism 
of  government  enterprises,  the  Deutsche  Zeitung  observes  that  "Heir 
Reinhold  Kraetke,  State  Secretary  of  the  Imperial  Post  Office,  doubt- 
less is  of  the  honest  opinion  that  everything  is  running  smoothly  under 
his  administration.  *  *  *  but  the  inefficiency  of  the  Berlin  tele- 
phones continues  to  increase  from  year  to  year,  and  sooner  or  later 
conditions  will  be  as  bad  as  they  are  in  Paris.  Whoever  has  tele- 
phoned, or,  rather,  tried  to  telephone,  in  Paris,  knows  that  he  fails 
about  ninety-nine  times  out  of  a  hundred  to  get  the  connection.  For 
the  most  part,  central  does  not  answer  at  all  and  if,  after  a  long  wait, 
she  does  answer,  she  gives  the  wrong  number.  And  here  the  matter 
ends.  The  time  spent  in  telephoning  is  so  much  time  wasted.  In 
Berlin,  things  have  not  yet  reached  such  a  state  of  demoralization,  but 
they  are  fast  approaching  it." 

The  Zeitung,  like  many  of  the  other  German  newspapers,  saw 
only  the  result,  and  mistook  the  cause  as  personal.  It  is  not,  of  course, 
Herr  Kraetke,  nor  any  other  German  official,  who  is  responsible  for 
the  present  condition  of  the  German  telephone  service,  but  the  sheer 
inappropriateness  of  governmental  machinery  to  the  management  of 
a  commercial  utility  upon  a  commercial  basis;  an  inherent  defect,  not 
German,  but  governmental.  This  is  strikingly  brought  out  by  the  fol- 
lowing illustration. 

For  years,  the  German  Telephone  Administration  has  been  strug- 
gling to  effect  a  single  change  in  policy — the  revision  of  a  rate  schedule 
which  daily  grows  more  inadequate  and  troublesome.  The  rate  sched- 
ule now  in  force  in  Germany  was  put  into  effect  in  1899.  In  1906  the 

11 


government  awoke  to  the  fact  that  the  rates  had  become  obsolete,  and 
utterly  unsuited  to  the  needs  of  the  service.  There  was  rank  dis- 
crimination between  the  city  and  country  districts.  Complaints  in- 
numerable kept  pouring  in,  and  business  was  suffering  badly.  Ordi- 
narily, a  private  concern  would  have  been  forced  to  settle  the  matter 
in  a  few  months,  or  a  half  year  at  the  most.  But  here  is  a  brief  sum- 
mary of  the  action  taken  by  the  German  government : 

9n  March  10,  1906,  the  Reichstag  passed  a  resolution  "that  an  equitable 
distribution  of  costs  between  city  and  country  districts  be  introduced."  No 
action  for  nearly  a  year. 

^  On  May  3,   1907,  the  Reichstag  again  passed  the  same  resolution.     No 
action  for  seven  months. 

On  December,  1907,  the  Imperial  Telegraph  Administration  published  a 
"Memorial  on  the  Changing  of  the  Telephone  Rate  Law,"  with  suggestions 
as  to  the  changes  desired.  The  plan  was  submitted  to  a  commission.  The 
commission  cut  out  some  of  the  suggestions,  substituted  others,  and  passed 
the  matter  back  to  the  Administration.  The  Administration  framed  a  Revised 
Bill.  No  action  for  more  than  a  year. 

On  February  8,  1909,  the  Revised  Bill  was  submitted  to  the  Reichstag. 
The  Bill  was  favorably  received  by  the  Reichstag,  and  turned  over  to  the 
Budget  Committee.  Then  the  Reichstag  closed.  No  action  for  eight  months. 

On  November  29,  1909,  the  Bill  was  again  submitted  to  the  Reichstag  for 
final  consideration.  No  action  for  five  months. 

In  the  latter  part  of  April,  1910,  the  Reichstag  again  turned  the  Bill 
over  to  the  Budget  Committee  for  report.  No  action  for  seven  months. 

On  December  6,  1910,  the  Budget  Committee  submitted  a  report,  modify- 
ing the  previous  scheme  of  reform  submitted  by  the  Administration.  The 
result  was  a  compromise,  to  which  the  Administration  agreed,  and  a  new 
Revised  Bill  was  sent  to  the  Reichstag  for  a  second  reading.  The  Reichstag 
referred  it  back  again  to  the  Budget  Committee.  No  action  for  several 
months. 

On  May  4,  1911,  the  Bill  was  again  considered  by  the  Budget  Committee. 
A  new  compromise  bill  was  drawn  up,  which  met  with  such  bitter  opposition 
that  the  Budget  Committee  adjourned  without  reaching  a  final  conclusion. 

There  has  been  no  report  of  action  since ;  only  the  Zeitschrift  fur 
Schwachstromtechnik  in  February,  1912,  reported  the  following  inter- 
esting development:  "The  make-up  of  the  old  Reichstag  left  little 
ground  for  the  hope  that  the  proposal  for  a  new  telephone-rate  law, 
which  was  advanced  by  the  Government,  would  meet  with  a  favorable 
reception,  in  spite  of  the  fact  that  the  proposition  had  undergone 
drastic  changes  in  the  Commission.  The  recent  elections  have  brought 
about  such  a  change  in  the  relative  strength  of  the  parties,  that  even 
that  last  version  of  the  proposal,  for  which  a  majority  could  have  been 
won  in  the  old  Reichstag  only  with  the  greatest  difficulty,  has  become 
utterly  hopeless." 

Enough  has  been  said,  perhaps,  to  indicate  that  even  Germany, 
with  all  the  alleged  vigor  of  a  monarchical  and  centralized  administra- 
tion, has  been  unable  to  escape  the  inexorable  principle  that  a  govern- 
ment, by  the  very  nature  of  its  make-up,  is  incapable  of  attending  to  a 
commercial  utility  with  anything  like  the  benefit  to  the  public  which 
can  be  furnished  by  private  enterprise. 

12 


One  more  example  may  be  cited — that  of  Australia — because 
Australian  conditions  are,  in  many  respects,  closely  similar  to  those  in 
the  United  States.  The  telephone  service  in  Australia  was  originally 
administered  by  the  various  states  which  make  up  the  Commonwealth ; 
but  in  1901,  the  Commonwealth  itself  assumed  entire  management  of 
the  telephones.  It  was  hoped,  by  this  change,  that  flagrant  evils  in 
the  public  administration  of  the  services  would  be  eliminated  by  con- 
solidation under  the  Commonwealth.  But  conditions  did  not  improve ; 
if  anything,  they  became  worse;  so  that,  after  years  of  mismanage- 
ment, public  clamor  grew  so  strong  that  a  Royal  Commission  was  ap- 
pointed to  investigate  the  Post,  Telegraph  and  Telephone  service,  to 
determine,  if  possible,  the  source  of  the  trouble.  The  Commission 
issued  its  report  in  October,  1910.  On  the  whole,  it  is  one  of  the 
severest  arraignments  which  has  ever  been  made  by  a  body  of  public 
officials  against  government  mismanagement  of  a  public  utility.  But 
it  is  particularly  noteworthy  in  this  respect:  it  places  the  finger  pre- 
cisely on  the  sore  spot  of  the  whole  system.  This  is  what  the  Com- 
missioners found: 

"The  reason  assigned  by  all  the  officials  for  the  failure  to  place  the 
services  in  proper  working  order  was  want  of  sufficient  funds.  There  is 
evidence  that  the  Department  in  1901  endeavoured,  through  the  Treasurer  of 
the  time,  to  obtain  the  necessary  funds  to  place  the  services  in  an  efficient 
condition  by  resorting  to  a  loan,  but  Parliament  refused  to  sanction  this 
proposal.  *  *  *  * 

"The  result  of  unduly  curtailing  expenditure  was  pointed  out  repeatedly 
by  the  Department,  and  the  required  provision  was  made  on  the  Estimates, 
but  was  reduced  by  the  Treasurer.  The  longer  reconstruction  is  deferred  and 
the  longer  installation  of  a  new  system  is  postponed  the  more  expensive  the 
work  becomes,  on  account  of  extensions  made  to  the  old  system.  Construc- 
tion methods  were  found  to  be  practically  the  same  as  in  1901,  as  the  Depart- 
ment claimed  it  had  been  impossible  to  improve  those  methods  since  that 
date,  although  the  adoption  of  improved  methods  would  obviously  have  tended 
towards  economy.  It  may  be  mentioned  that  between  1886  and  1904  the  New 
York  Telephone  Company's  plant  was  reconstructed  three  times  to  bring  the 
equipment  up  to  the  highest  standard,  and  to  render  the  service  more  efficient. 
From  1900  to  1907  the  Bell  Telephone  Company,  United  States  of  America, 
spent  about  £70,000,000  on  telephone  undertakings." 

The  Commission  then  goes  on  to  describe  the  antiquated  switch- 
boards, ill-kept  lines,  impaired  efficiency  and  general  demoralization  in 
service,  which  naturally  flowed  from  the  policy  of  financial  starvation 
that  characterized  the  government's  management  from  the  start. 

And  so  we  might  go  on,  pointing  the  moral  from  the  other  govern-  .^ 
ments  which  have  assumed  the  telephone  business,-^ Austria/*  Italy, 
Switzerland  and  the  rest.  It  is  the  same  story  in  each  case,  recalling, 
with  peculiar  aptness,  Macaulay's  description  of  Johnson's  early  con- 
temporaries: "They  knew  luxury,  they  knew  beggary,  but  they  never 
knew  comfort."  The  government  telephones  know  extravagance,  they 
know  penury,  but  they  never  know  that  continuous  and  comprehensive 
financing,  without  which  an  adequate  service  is  impossible.  In  each 
case  we  see  the  same  characteristic  in  varying  guises:  an  inherent 

13 


incapacity  to  administer  a  commercial  utility  with  anything  like  the 
efficiency  and  promptness  of  which  it  is  capable,  all  due  to  a  definite 
and  natural  limitation  to  which  governments  are  subject, — as  definite 
and  natural  as  that  which  has  decreed  that  the  brain  shall  not  assume 
the  functions  of  the  stomach,  the  liver  or  the  heart. 

In  the  United  States,  happily,  the  government  has  retained  its 
natural  supervisory  function, — that  of  a  brain,  if  you  please.  Recog- 
nizing that  a  government  is  far  better  able  to  regulate  and  check  abuses 
of  private  corporations,  than  to  regulate  and  check  its  own,  it  has  so 
far  steered  clear  of  attempting  functions  for  which,  by  its  very  nature, 
it  was  never  intended ;  and  the  result  has  been  decidedly  fortunate  for 
Americans.  In  marked  contrast,  for  instance,  to  the  various  govern- 
mental telephone  services  we  have  described,  the  high  stage  of  perfec- 
tion reached  by  the  American  telephone  service,  so  admired  by  foreign- 
ers visiting  this  country,  stands  out  as  an  illustration  of  what  may  be 
expected  when  the  development  of  a  commercial  utility  is  allowed  to 
proceed  along  natural  lines.  And  precisely  the  element  which  is  lack- 
ing in  governmental  administration  has  been  responsible  for  the  effi- 
ciency and  despatch  afforded  by  private  enterprise:  the  deliberate 
mapping  out  of  a  policy,  the  laying  of  plans  and  the  spending  of  money, 
not  only  for  the  day,  not  only  for  the  morrow,  but  for  the  next  year, 
and  the  next  ten  or  twenty  years.  It  is  clear  that  this  element  cannot 
be  present,  but  for  an  absolute  guaranty  of  stability  for  a  definite 
period  of  time  in  the  future:  a  complete  freedom  from  the  gusts  of 
opposing  policies,  political  or  otherwise, — an  atmosphere  of  reason- 
able expectation  that  deliberate  and  painstaking  planning  will  be 
followed  by  equally  deliberate  and  painstaking  execution. 

There  is  not  a  government  on  the  face  of  the  earth  capable  of 
this  sort  of  management.  No  government  has  been  able  to  escape  the 
natural  law  that  all  organisms,  political  as  well  as  individual,  have  a 
definite  limitation  of  functions  stamped  upon  them,  beyond  which  they 
cannot  step,  save  with  harm  to  themselves  and  others.  Numerous 
arguments  have  been  advanced  against  government  ownership:)  the 
impairment  to  the  fundamental  and  primary  functions  of  government 
which  comes  from  throwing  onto  its  already  overburdened  shoulders, 
new  and  vastly  more  complicated  duties  ;^the  increased  opportunities 
for  political  corruption  3  the  undue  political  influence  of  a  growing 
army  of  civil  service  employes,  who,  by  their  votes,  can  force  im^ 
moderate  class  legislation  at  the  expense  of  the  public  $the  undemocratic 
trend  toward  centralization,  militarism  and  bureaucracy,  with  its  ten- 
dency to  subject  individual  liberty  to  a  petty  officialdom  ^improper  rate 
making  forced  by  political  pressure,  producing  deficits  which,  through 
taxation,  must  fall  on  user  and  non-user  alike  ^arbitrary  treatment  of 
consumers,  inspired  by  the  knowledge  that  from  government  there 
can  be  no  appeal, — all  these  arguments  have  been  advanced,  from  time 
to  time,  against  the  proposition  of  government  ownership  in  this  coun- 
try.  ^But  in  the  last  analysis,  it  will  be  seen  that  these  considerations 

14 


either  spring  from  or  center  about  a  primary  law, — the  natural  and 
inherent  limitation  of  governments:  that  governments  were  never  in- 
tended to  create,  but  to  conserve  and  protect  ;/that  a  government  is 
most  beneficial  when  it  refuses  to  overstep  its  natural  limitation,  and 
guarantees  to  a  people  a  minimum  of  interference  with  individual 
liberty,  combined  with  a  maximum  of  protection  against  individual 
abuses. 

When  Socrates  said,  "Know  thyself/'  he  had  in  mind  the  disaster 
which  an  individual  invites  when  he  attempts  something  Nature  never 
fitted  him  for.  The  world  is  full  of  misfits  in  individual  vocations :  of 
born  artisans  who  have  wasted  lives  trying  to  practice  law ;  of  dismal 
failures  in  the  world  of  art,  who  might  have  been  fortunate  business 
men;  of  mediocre  journalists,  who  might  have  starred  in  the  profes- 
sions. The  personal  tragedy,  in  each  case,  lay  in  a  failure  to  realize 
the  personal  limitation;  in  attempting  what  might  better  have  been 
left  to  others.  Far  more  tragic,  because  more  far-reaching  and  perma- 
nent, is  it  for  a  government  to  attempt  what  it  is  inherently  incapable 
of  doing  well. 

This  country  was  born  simultaneously  with  the  awakening  of  a 
new  era  in  human  enterprise.  Its  progress  has  come  from  a  free  and 
untrammeled  expression  of  the  individual.  In  the  course  of  its  develop- 
ment, evils  have  sprung  up, — the  evils  of  individual  license.  Prominent 
among  them  have  been  the  corporate  abuses  from  which  the  public 
has  suffered  in  the  absence  of  sufficiently  prompt  and  adequate  inter- 
ference by  government.  The  result  has  been  some  sentiment,  of  late, 
for  ownership,  by  government,  of  the  more  important  utilities, — 
railways,  telegraphs  and  telephones.  But  we  shall  profit  little  indeed 
if,  to  right  one  evil,  we  establish  another  more  serious.  It  were  far 
better  for  government  to  emulate  the  example  of  the  human  will, 
which  guides  and  restrains  our  actions  when  they  become  immoderate, 
instead  of  assuming  the  various  functions  itself. 

It  is  probably  this  thought  that  President  Woodrow  Wilson  had 
in  mind,  when  he  said,  in  his  speech  before  the  Federation  of  Demo- 
cratic Clubs  in  Pennsylvania: 

"The  regulation  of  corporations  is  hardly  less  significant  and  central. 
We  have  made  many  experiments  in  this  difficult  matter,  and  some  of  them 
have  been  crude,  and  hurtful,  but  our  thought  is  slowly  clearing.  We  are 
beginning  to  see,  for  one  thing,  how  public  service  corporations,  at  any  rate, 
can  be  governed  with  great  advantage  to  the  public  and  without  serious  detri- 
ment to  themselves,  as  undertakings  of  private  capital.  Experience  is  removing 
both  prejudice  and  fear  in  this  field,  and  it  is  likely  that  within  the  very 
near  future  we  shall  have  settled  down  to  some  common  rational  and  effective 
policy.  The  regulation  of  corporations  of  other  sorts  lies  intimately  connected 
with  the  general  question  which  ramifies  in  a  thousand  directions,  but  the 
intricate  threads  of  which  we  are  slowly  beginning  to  perceive  constitute  a 
decipherable  pattern.  Measures  will  here  also  frame  themselves  soberly 
enough  as  we  think  our  way  forward." 

15 


It  is  to  be  hoped  that,  in  untangling  the  "intricate  threads"  whi< 
constitute  the  "decipherable  pattern,"  the  Government  of  this  counti 
will  avoid  the  pitfalls  into  which  foreign  governments  have  droj 
in  their  assumption  of  extra-governmental  functions.     The  knot  is 
be  untangled  by  the  deft  and  trained  fingers  of  scientific  governmei 
regulation,  rather  than  the  knife  of  government  ownership,  to  th| 
end  that,  instead  of  a  jangle  of  frayed  and  twisted  government  entei 
prises,  we  shall  have  a  complete  and  harmonious  commercial  fabric 
beneficial  to  public  and  public  utility  alike ;  and  the  growing  popularil 
of  our  public  regulating  commissions  is  a  hopeful  sign  that  the  genii 
of  American  institutions  is  beginning  to  compass  this  truth. 


14  DAY  USE 

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